Now Hiring: Smart and Ethical Hellhound

“He was known as the Hellhound of Wall Street,” said my lawyer friend.

I was catching up with an old coworker over coffee and we started talking about politics. We were both disappointed that there were no ongoing investigations to uncover the callous wrongdoings that brought about the Great Recession. Only those who unmistakably and monumentally dropped the ball, like Bernie Madoff and Raj Rajaratnam, faced criminal prosecutions.

The book is riveting — a David versus Goliath battle in Depression era America. But while certain parts of the book are page-turners, there are some parts that drag considerably. The continual updates on national bank closures are extremely dry and long-winded, and only the most finance-wonky readers will get through these parts without checking to see how much longer these passages go on. (Too long, at times).

And I still recommend the book for the main story. Skim the sections about bank closures if you must, but you’ll thank me for the recommendation.

In 1886, Ferdinand Pecora was four-years old when he immigrated to United States from Italy. Despite the anti-Italian stereotypes of the time, Ferdinand succeeded in his new country from the get-go, graduating from the eighth grade as valedictorian and class president. The death of his two older brothers and the incapacitation of his father from a work injury at the shoe factory dashed his dreams of pursuing higher education. Now a teenager and the family’s primary breadwinner, Ferdinand went to work as a clerk in a law office. For a time, Ferdinand attempted night school at New York Law School, but dropped out and was admitted to the bar after completing New York’s then-in-existence alternative certification requirements. Eventually, Ferdinand’s extraordinary oratory talents led him into politics and public office as an assistant district attorney in Manhattan, where he attained a reputation as an honest, fair, and talented prosecutor with a flair for effective theatrics in the courtroom.

The book then goes on to detail the investigation of Wall Street initiated by the Hoover administration in 1932. The ultimate goal was not to lay the groundwork for federal legislation — which the Hoover administration vehemently opposed — but rather to embarrass short sellers who were blamed for causing the market collapse with their trading practices (sound familiar? see here and here).

The investigation dawdled for a long period under the Republicans. Eventually, South Dakota senator Peter Norbeck, a Democrat, took control of the investigation but encountered the same crucial problem the Republicans had: finding a “smart, aggressive, courageous, and incorruptible” attorney to lead the investigation of Wall Street’s most powerful institutions and the individuals who ran them. After months of going down a long list of names and with only six weeks until the end of the investigation’s mandate, Senator Norbeck arrived at Mr. Pecora.

At this stage, many expected that the investigation would quietly die as a failed effort, but Ferdinand Pecora breathed new life and vitality into the mission. After reviewing the investigation’s mandate, the newly appointed counsel angled to broaden the scope of the inquiry beyond short selling to the issuance and distribution of securities. He would specifically focus on National City Bank and it’s president and chairman, Charles Mitchell.

Mr. Pecora, pressed for time, poorly compensated, and with a skeleton staff, educated himself as best as possible about the intricacies of issuing securities and conducted a thorough investigation into the cause behind the market’s collapse.

And so the hearings began on February 21, 1933. Mr. Mitchell was called to testify as the opening witness. As the leader of America’s largest financial institution, Mr. Mitchell was well respected, and believed to be possessed of “almost mythical business genius and foresight.” But within ten short days, Mr. Mitchell’s would leave Washington with his reputation in tatters.

During the first day of hearings Mr. Pecora revealed that between 1927 and 1929, National City Bank paid Mr. Mitchell $3.5 million (roughly equivalent to $500 million in today’s dollars). When the crash occurred in late 1929, National City had already paid out its mid-year bonuses. When asked by Mr. Pecora whether Mr. Mitchell and the other National City executives returned their mid-year bonuses because of the devastating losses in the Crash that very year, Mr. Mitchell responded that the money was considered an “advance” on future bonuses (because of the Depression, there no bonuses would be issued for the next four years.).

But the more incriminating and juicy development that emerged was that in late 1929, after National City’s stock plummeted, Mr. Mitchell sold a large block of company stock to his wife and repurchased the stock in 1930 for the selling price. The clear purpose behind this transaction was tax dodging. Mr. Perino writes, “No one in the room could have expected this. . . . This was supposed to be a hearing about stock-selling practices, but Pecora had just succeeded in making one of the leading bankers in the country—a man of theoretically ‘unimpeachable integrity’—admit to what might have been criminal tax evasion.”

Over the next nine days of hearings, Mr. Pecora demonstrated that National City generally did not disclose information in its prospectuses for securities offerings that could be considered harmful or might dampen the rosy and positive outlook depicted. In response, Mr. Mitchell and other bankers at National City — who the media now dubbed “banksters” — maintained that disclosure of any such information in the prospectuses was unnecessary, even undesirable, because the “experts” could make sounder financial decisions than ordinary members of the public. To refute the bankers’ contention, Mr. Pecora investigated several of National City’s securities offerings and proved that they were extraordinarily poor investments and that many red flags were simply ignored or brushed aside.

As a result of Mr. Pecora’s wildly successful tenure during the hearings and the six weeks remaining in the investigation, the Roosevelt administration renewed the investigation and allowed Mr. Pecora to continue with the inquest. This brought J.P. Morgan, Jr. to Washington, where it was revealed that his company had a preferred client list to which it sold stock that was guaranteed to appreciate in value. While not illegal at the time, many were outraged to learn of the unfair advantages conferred on the privileged over the ordinary investor.

During President Roosevelt’s first 100 days in office, the political climate for enacting federal legislation to regulate banks was overwhelming. As Joel Seligman, an SEC historian, put it, “the period of the First Hundred Days of the Roosevelt administration was that rare time when money talked and nobody listened.” What Mr. Pecora almost single-handedly uncovered changed the face of the financial industry for over a century. He can be considered the impetus for the enactment of the Securities Act of 1933, the Banking Act of 1933, and the Securities Exchange Act of 1934.

Following the Great Recession of the 21st century, one op-ed contributor for the New York Times asked, “Where is Our Ferdinand Pecora?” It’s a great question.

The book is inspirational. It only takes one person with the intelligence, will, integrity, and perseverance — a modern day Ferdinand Pecora — to lead the charge.

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About Legal As She Is Spoke

Legal As She Is Spoke is an online project of the Program in Law and Journalism at New York Law School. Our site reports on the state of legal journalism and encourages conversation about the accuracy and felicity of reporting on law. For an explanation of our name, click here.

The Guilty Prosecutor

Last year, LASIS reporter Halina Schiffman-Shilo wrote about her experiences with the UN from Arusha, Tanzania. She's back in the urban jungle now, and is examining human rights abuses here at home, by district attorneys against innocent defendants. Enter, the Guilty Prosecutor.